Presenting The Fundamental Flaw In The Fed's Thinking

Tyler Durden's picture

This one simple chart below shows what is possibly the biggest and most fundamental flaw in Bernanke's approach to spurring the economy, which to him, of course, means rising prices of risky assets, aka the stock market.

The chart above shows the return of two simple things: the return of 4.25% 30 Year Bond issued November 2010... and the S&P.

As is vividly shown on the chart, the return of the long-bond is nearly three times greater than that of the broader equity market in 18 short months!

And therein, ladies and gentlemen, lies the rub.

Recall that Bernanke said something substantively as follows:

"When our policy response lowers interest rates on govt bonds, it induces market participants to take more risk.  Someone selling their govt bond to us may go out and buy a corp bond, thereby lowering spreads. A bank selling their govt bond to us may go out and make a loan..." 

There is one problem with this logic: it is dead wrong. Because instead of forcing investors to rush out of the bond market, which potentially has much more upside embedded (the 30 Year is yielding 2.7% right now: this means the actual price of the 30 Year can continue going up and up and up), investors, even those "sophisticated" ones at banks, hedge funds, and prop desks who can trade CDS, IR Swaps, variance swaps, swaptions, and things the retail investor has never heard of, are doing something else, and something much simpler, entirely.

They are simply front-running the Fed!

The Fed's entire policy of boosting the economy is a failure for many reasons, but the primary purpose embedded therein - to lift stock markets, will forever be subordinated (to use the parlance of our times) to just frontrunning the Fed, which simply means buy whatever the Fed is buy, and sell whatever (if anything) it is selling.

In simpler format:

  1. Frontrun what the Fed has publicly telegraphed to be doing
  2. ...
  3. Profit

And as long as the Fed continues on the course of LSAP, either unsterilized or sterilized ala Twist, this will continue, and the Fed will continue failing upward.

Sadly, this also means that at the end the Fed has only one option: to go Japanese and start buying not only REITs and ETFs, but ultimately individual stocks.

At that point the best purchase, however will not be the stock market, but wheelbarrows.

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nope-1004's picture

The Fed's assumptions on economic outcomes failed miserably.  Which proves that economics is voodoo shit.  The theory doesn't match reality.  And it also shows that the Fed can't examine anything on an independent basis, it refers to history when history never repeats exactly the same.

Benocide is boxed into a corner and he knows it.  Just can't rattle the cage until the election.



dlmaniac's picture

Economy simply cannot be managed.

Looks like the collapse of communism in last century has not taught the world enough a lesson so they are due to get another lesson to learn it again.

Shameful's picture

"What experience and history teach is this — that people and governments never have learned anything from history, or acted on principles deduced from it."

Georg Wilhelm Friedrich Hegel

Mankind cannot and will not learn from the past.  All the mistakes of the past will be repeated over and over again.  We few can learn and profit, but the majority will fumble though.

4horse's picture

these are not mistakes dumfuc


and, however shameful, adumbrating hegel mistakes ffilosophy for soffistry, nevermind ffinance, all at which they are expert: you only cogito to summon what they've disseminated and served, sloppy seconds, and only after and put to their thorough ffuckin use


otherwise, The Divine Whore, you wouldn't know sophistry from their mata hari, nor atom from adam



here. find it, otto. your ass from your elbowa footnote like take a global warming to the subject . . .

economics9698's picture

This is off topic but does anyone know how you get high on bath salts?  WTF?

HarryM's picture

Maybe not he economy , but certainly the stock market


Broke the piggy bank today with the "Market won't be happy" line

Half_A_Billion_Hollow_Points's picture

who cares about the bernank?  


bitcoin is starting to skyrocket again, and mining reward will drop 50% in 5 months.  


Fuck the banking system; fuck the bernank; fuck fiat.

Paul Atreides's picture

How do you use bitcoins when you can't access the internet? or a computer? or electricity?

Half_A_Billion_Hollow_Points's picture

Offline transactions are possible.

But the scenario you're describing is unrealistic (worlwide); there is a whole lotta renewable electricity around the globe.  Though oil's fucked; electricity will remain a-ok in many parts of the globe for the foreseeable future

UP Forester's picture

Two words you may not have come across yet:

Carrington Event

Two more words you may not have seen:

Grid Interconnectivity


Half_A_Billion_Hollow_Points's picture

Ok mad max, whatever fits your fancy.  I'm also on the yellow brick road, but the fact is that btc has grown 50% in the last 45 days, that it's resilient to a banking holiday, and is extremely scarce at 21M tops.  


But you're right, it won't survive the end of the universe, rather unfortunately.

John_Coltrane's picture

Here's an acronyme you grid stability "experts" might want to learn, CME.  That's coronal mass ejection, a massive ejection of plasma from our sun which is presaged by massive sunspot and magnetic activity both of which is set to peak in the next two years.  We'll have about 20 minutes to shut down the entire grid when that huge cloud of charged particles (a plasma) hits and collaspses the earth's magnetic field inducing million volt transients in transformers and blowing them out.  It will take out every energized transformer in the grid, including those used in photovoltaic installations to step up the low DC voltage to 120V AC.  The last big one hit around 1857 and would have taken out the entiro world electical grid had there been one and the last much smaller one (2006?) took out the entire eastern grid (there aren't enough spare transformers to get it up for 6 months to 1 year).

This event has a much higher probability than a major earthquake or meteor hit.  (See this month's Scientific American for more  details)

unununium's picture

What the hell are you hoping to buy when there is no internet, or computer, or electricity?


4horse's picture

the Fundamental Flaw

FFuck . . .

just when, zh, will the FFed be seen for what it is


PNAC2013 at its anniversary, next year? after a 10th decade together with its IRS and ADL doing exactly what it was ffounded ffor



masterinchancery's picture

It isn't economics, which describes actual behavior; it is just the voodoo shit practiced by Ivy League academics.

vmromk's picture

Obama, why isn't Bernanke in some federal prison already ?

Bernanke makes Madoff look like an amateur.

Dr. Engali's picture

Ummmm........ have you been paying attention? Doess Corzine , and furious ring any bells?  Executive privilege man.

derek_vineyard's picture

I actually think bernanke believes in what he's doing and is not profiting personally by trading his decisions.  If I hire an extremist that ruins my business, its not his fault....its my fault.  And now with an OBama vs Romney election we are getting what we deserve for not standing tall or for not leaving the country for a better government or grin and bear it.   Its useless to whine....when 95% of americans want romney or obama.

vast-dom's picture



PS I have also added this my earlier post to the bottom of email:


  • FED SAYS INFLATION HAS DECLINED, REFLECTING OIL -> inflation targeting is illegal according to the Federal Reserve’s mandate.

When yours truly began investing in these markets i didn't sign up for TOTAL centrally planned subervsion of now bound, gagged, tied up and brutally (banker/fed) gang-raped markets.


Thank you for your prompt attention in this matter.

Daily Bail's picture

I wonder how Krugman and Delong feel right now...

Anyone remember Delong calling Bernanke a punk for not putting out an additional $6 trillion in QE...?


And You Thought Bernanke Was Bad: Brad Delong Fantasizes About Replacing Him With A $6 Trillion Quantitative Easer



And here's Fed-loathing James Grant debating Delong on the merits of QE3:

The Keynesian Class is wretching today.


potlatch's picture

I do not, personally, mind Keynesianism, except for this crucial current fact: they have yet to be able, to my satisfaction explain, at all, exactly where and what the growth would be, allegedly spurred by their policy preference.


Where would the growth be?  You can't point to a city's water system and go: there ya go!


That is not the growth that is intended, and they know it, thus they are dishonest to their own theory.


At least Gingrich had the integrity to realize: moonbase or bust.

PaJoad's picture

Uhhhh, did you just use Gingrich & integrity in the same sentence?

A Lunatic's picture

Try substituting the words "complete annihilation of the private sector and individual liberty" for "growth". There, see.................

potlatch's picture

and where is the growth in *that*?


Everyone has a solution, but no one can say what the solution would actually produce.  They just called it freedom from tyranny?  Come on.


What growth?  Where?


Moonbase or bust, you'll see

skepticCarl's picture

Bernanke is not "Wrong".  He is the JUDGE, so what he says, goes.  Why do ZH'ers continue to be surprised and annoyed at his policies?  They haven't changed, ever, and he keeps telling us that they won't.  It is ridiculous for us to wring our hands and claim "But wait, he's doing it all wrong!".  Just deal with the storm that we can't change:  Go long risk assets, like he is telling us.

XitSam's picture

Agreed. This isn't a flaw, this is the plan! Wake up!

vast-dom's picture

so much for hope and change. so much for trying to do something about this fuckfest. just play along, huh? i guess you can go back to whoring yourself Carl cause it's just easier that way. maybe you won't get an STD. maybe you'll even learn to enjoy it. LONG APATHY son. And while you're at it SHORT ZH since all that's going down here is futile.

A Lunatic's picture

Giving a fuck is so frustrating. I'm tired of knowing the solution.

4horse's picture

moonshot . . .

Giving a fuck __good. otherwise eventually outnumbered, to say the least, presently outgunned as is

monkeysfuckinafootball __bad. I'm tired of knowing the solution __verybad
                                                                                                                seeing through the game
ain't the same as winning it north-dallas forty




verybadthings: ff, fantasy football, making a movie about how yous buried -in fact fucked,dead&buried- some dead pigskin, and . . . it stays in vegas

their ad. their town. their movies. their .001% solution

Miffed Microbiologist's picture

I'm too scared to go long risk assets 'cause I'm not sure when he'd pull the rip cord and squish me like a bug. I'm at the point I'm going to keep stacking and praying. All the other herd mates in my sphere are all in and happy with their returns, laughing at me running for the hills.


ejmoosa's picture

For Bernanke to admit he is wrong would mean he has to refute a lifetime of his academic posturing on how things work.  That ain't happening.

whatsinaname's picture

I dont get this - how can they extend Twist until the end of 2012 if they have only 2 months of "stock" to sell of the short term Tres ?

just a dude's picture

They can buy more short maturities when the UST issues them later this year.

Let them all fail's picture

Tyler - Have you guys ever tried getting access to the Bernanke's press conference? Or tried to get someone with access to ask your questions?

HelluvaEngineer's picture

Unfortunately they have a "Shirts and Shoes" policy.

bdc63's picture

I'm not too far from DC ... I'll go and represent ZeroHedge.  Feel free to submit questions below ...

... wait ... are flip flops okay? ...

Nothing To See Here's picture

Send in Maxine Waters, she's gonna grill Bernanke real hard


El Oregonian's picture

"Send in Maxine Waters, she's gonna grill Bernanke real hard"

I think you meant "Thrill" Bernanke real hard. This would be closer to the truth.

Chaffinch's picture

The policy-makers will provide the flip-flops

TJ00's picture

So Julian Assange with Ecuadorian diplomatic papers?

Village Smithy's picture

Don't you think that some guy in a dark suit and sunglasses might be inclined to follow the dude with the Zero Hedge ID badge home?

TJ00's picture

Isn't E2 (Escape and Evasion) part of the ZH training?

BlackholeDivestment's picture

...Idea. Sneak in a Fight Club Drone (minus the submachine gun, for now, lol) made to look like a Giant Apple with an Ipad open to Skype.

Call it ''TD QE3 2012 El DIAblo''. On the back, have a sticker, ''...first rule of Fight Club is'' and ask away. LMAO. 

...develope a TD 2012 Algo, called NOVA, lol, to ask the questions based on the Forbes Algo Reporter's more human than human reaction to the market algo's. LMAO. 

...please hug a human while you can. Lol.

Revert_Back_to_1792_Act's picture

This guy got in and managed to ask some questions.  Ignore the beginning..the interesting part is the Q&A session with Jerry Nelson not the Amero stuff with Bernanke. 

He is surprisingly candid.  You should research some of his answers. 

Three parts

Oh is another guy asking the Fed questions.

"Mail it to the Treasury (co-signer)..."



reTARD's picture

Wheelbarrows are so yesterday! Unlike the days of Weimar when paper was still primarily used, most everything today is electronic. 1's and 0's FTW perhaps?

Dr. Engali's picture

I'm hauling my fiat in the bed of my gas guzzling pick up truck.